Why the interbank rate matters

Repossessions are rising across the US

The Bank of England has said it intends to increase the amount of money available to the high street banks.

If the 'overnight' interest rate remains high, the Bank says it will allow commercial banks to borrow an extra £4.4 billion.

But what does this mean for savers and mortgage holders?

The world is currently experiencing something of a credit crunch, with banks increasingly unwilling to lend money to some individuals and firms.

Even bank-to-bank lending has been getting tighter.

Mortgage rates

Britain's Libor interest rate, the rate at which commercial banks lend to each other, recently jumped to its highest level for nearly nine years, touching 6.8%.

The Libor is an important determinant of mortgage rates as banks borrow at this rate to top-up their funding requirements.

"The people who may lose out are those who want a new mortgage," says Ray Boulger of Charcol Mortgage Brokers.

"Those lenders who rely on money markets to raise a lot of their funding may have to put the rate up on their tracker mortgages."

Growing defaults

The current rocky conditions in the City can be traced back to growing defaults on sub-prime mortgages in the US.

Banks made these loans, often to people with low incomes and no deposit, when the American housing market was booming.

They then used complex financial instruments to pass on the risk to hedge funds and other banks around the world.

Now that interest rates have risen and house prices have started to fall across much of the US, many of the mortgages have turned bad.

More cautious

The internationalisation that has swept the financial system has made a US problem a problem for markets around the world.

Investors are hoping credit worries will be contained

Steven Bell, chief economist at hedge fund GLC says: "We don't know exactly which backs might be affected and how far the problem will go."

Losses have meant that institutions have started to worry about the security of other debt instruments and have become more cautious in their lending.

Banks will also scrutinise your credit history more than before, and those with the weakest rating may find now a difficult time to borrow.

Savings products

Normally a Bank of England rate freeze means no news for savers, but because the Libor is so high, rates have been heading up on some savings products.

For instance, the Derbyshire Building Society has raised the rate one of its accounts by over half a per cent to 6.85%.

According to Steven Bell, "It's as if we've had a base rate rise even though the Bank of England has done nothing.

"That's very worrying for anyone with a mortgage but obviously good news for savers".